1. What are the key factors on which external financing depends, as indicated in the AFN equation? 2. Assume that an average firm in the office supply business has a 6% profit margin, a 40% total liabilities/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it true that if such a firm is to have any sales growth (g > 0) , it will be forced to borrow or to sell common stock (that is, it will need some nonspontaneous external capital even if g is very small)? Explain.
3. Would you agree that computerized corporate planning models were a fad during the 1990s but that because of a need for flexibility in corporate planning, they are no longer used by most firms? Explain.
4. Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark (√) next to those items that typically increase spontaneously.
Accounts payable ________________ Notes payable to banks ________________ Accrued wages ________________ Accrued taxes ________________ Mortgage bonds ________________ Common stock ________________ Retained earnings ________________
5. Suppose a firm makes the following policy changes. If the change means that external nonspontaneous financial requirements (AFN) will increase, indicate this with a (+) ; indicate a decrease with a (-) ; and indicate an indeterminate or negligible effect with a 0 . Think in terms of the immediate short-run effect on funds requirements.
a. The dividend payout ratio is increased. ________________
b. Rather than produce computers in advance, a computer company decides to produce them only after an order has been received. ________________
c. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment. ________________
d. The firm begins to sell on credit. (Previously, all sales had been on a cash basis.) ________________